City of Findlay v. American Surety Co.

This is an error proceeding from an order of the Common Pleas Court sustaining a demurrer of the defendant in error, the American Surety Company of New York, one of the defendants in the lower court, to the amended petition of the plaintiff in error, The City of Findlay, Ohio, the plaintiff in the lower court, and entering final judgment in favor of defendant in error, the American Surety Company of New York. The parties will be hereafter referred to in the relation they appeared in the lower court.

On November 15, 1932, plaintiff filed its petition against the American Surety Company of New York, The First National Bank Trust Company, and C.W. Shireman, liquidating trustee, Findlay, Ohio.

On December 21, 1932, the defendant American Surety Company filed a demurrer to the original petition. No action was had on this demurrer, and on April 8, 1933, the defendant American Surety Company filed an amended demurrer. The amended demurrer was sustained by the court and leave granted to plaintiff to file an amended petition.

On July 14, 1933, plaintiff, pursuant to such leave, filed its amended petition in which it is alleged that it is a municipal corporation duly organized under the laws of the state of Ohio, located in Hancock county, and brings this suit by its City Solicitor; the defendant, the American Surety Company of New York, is a corporation organized and existing under the laws of the state of New York and authorized to do business in the state of Ohio, as surety; The First National Bank Trust Company is duly organized under the federal banking laws; and C.W. Shireman is the duly authorized and acting trustee in charge of the liquidation of the Buckeye Commercial Savings Bank.

It is further alleged in the amended petition that on the sixth day of December, 1927, the defendant American Surety Company entered into a written undertaking with plaintiff in the sum of $200,000 in the form of a bond, to take effect on the sixth day of December, 1927, and expiring at the close of business on the sixth day of December, 1928, or at the close of business on the date to which this bond has been finally extended, unless sooner cancelled, in which event such time means at the close of business on the effective date of such cancellation; and in the amended petition it is recited that said bond is attached to the original petition, marked Exhibit A, and made a part thereof.

It is further alleged that on the sixth day of December, 1928, said bond was in the same amount and under the same terms and conditions continued in writing under its provisions by the written consent of the principal and surety, to the close of business on the sixth day of December, 1929, and it is recited that said written extension is attached to the original petition, marked Exhibit B, and made a part thereof.

It is further alleged that on the sixth day of December, 1929, said bond was in the same amount and under the same terms and conditions continued in writing under its provisions by the written consent of the principal and surety, to the close of business on the sixth day of December, 1930, said written extension being attached to the original petition, marked Exhibit C, and made a part thereof.

It is further alleged that the conditions of said bond are as follows, to wit:

"Whereas, The Buckeye Commercial Savings Bank, of Findlay, Ohio, has been designated a depository of the funds of the City of Findlay, Ohio, pursuant to bid for such funds and award to The Buckeye Commercial Savings Bank, aforesaid, according to law, and for the rate of interest agreed upon between said Bank, and the City of Findlay, Ohio, through its proper officials;

"Now, therefore, the condition of the above obligation is such that, if the above bounden principal shall in due course pay on legal demand made during the term of this bond, all moneys deposited hereunder with it for the account of the obligee, together with interest at the rate agreed upon, then this obligation shall be null and void; otherwise to remain in full force and effect."

It is further alleged that in consideration of said bond and its extension executed by the defendant herein as surety, the plaintiff designated the Buckeye Commercial Savings Bank of Findlay, Ohio, as a depository for funds of the plaintiff from on or about December 6, 1927, by virtue of said bond, and deposited funds of the plaintiff in said Buckeye Commercial Savings Bank of Findlay, Ohio, and had on said date of December 6, 1927, a deposit of $367,274.61 to the credit of this plaintiff.

It is further alleged that on May 5, 1930, while said bond as extended remained in full force and effect the said Buckeye Commercial Savings Bank closed its doors and went into the hands of a receiver under the direction of the state Superintendent of Banks of the state of Ohio, and payment to its depositors, including the plaintiff, was then and there and thereby suspended, and the terms and conditions of said bond were broken, and plaintiff further says that at the time of such suspension of payments to its depositors, the plaintiff, as provided by its contract with said Buckeye Commercial Savings Bank and in conformity with the terms of said bond, had the following balances credited to its account, to wit:

Corporation account ............................. $212,588.08 Bond and coupon account, sinking fund ........... 1,999.21 Police relief, savings account .................. 12,628.01 Police relief, checking account ................. 544.39 Fire pension account ............................ 409.07 ----------- $228,168.76

It is further alleged that on or about the ninth day of May, 1930, a written notice of the default of the principal, with a verified statement of the facts showing such default and the date thereof, was mailed to the surety at its office.

It is further alleged that on the second day of June, 1930, the treasurer of the city of Findlay received the sum of $200,000 from the American Surety Company on the condition that the American Surety Company should receive such sum of money up to $200,000 of the amount plaintiff had on deposit at the time the Buckeye Commercial Savings Bank closed its doors, as shall remain after plaintiff had received the full balance, including interest, due it from the Commercial Savings Bank as of the time said bank closed its doors. A copy of the receipt and the approval of the same by the council of the city of Findlay are attached to the amended petition and marked respectively Exhibit D and Exhibit E.

It is further alleged in the amended petition that on or about December 19, 1932, under and by direction of the state Superintendent of Banks of the state of Ohio, the receiver of the Buckeye Commercial Savings Bank declared and paid to the depositors of said bank, including the American Surety Company on the sum of $200,000 and also including this plaintiff, a dividend of five per cent upon the principal of plaintiff's claim, amounting to $10,000 to the American Surety Company and $14,096.66 to the plaintiff, being a total payment to the plaintiff by the receiver of said bank by way of principal the sum of $19,456.51.

It is further alleged that after credits of all payments as aforesaid are applied there is due to the plaintiff from the defendant on its bond, as of the date of July 15, 1933, the sum of $14,096.35, on which last named amount there are no credits, and which amount under the terms and conditions of said bond became due and payable to this plaintiff, as provided by law and the terms of said bond.

The prayer of the petition is for judgment for plaintiff in the sum of $14,096.35 with interest at six per cent from the fifteenth day of July, 1933, against the defendant American Surety Company and for its costs and for all further relief.

Among the conditions set forth in the bond, attached to the original petition, marked Exhibit A and made a part thereof and referred to in the amended petition, are the following:

"Sixth. That in case of payment of a loss on account of a default hereunder the Surety shall be subrogated to such proportion of all the rights of the Obligee growing out of such loss, including dividends paid and to be paid out of the estate of the Principal, as the amount so paid by the Surety bears to the total deposit hereunder at the time of such default, and simultaneously with such payment the Obligee shall execute all papers required by the Surety and render all assistance, not pecuniary, to secure to the Surety the rights herein provided for.

"Seventh. That no suit, action or proceeding shall be brought or instituted against the Surety upon or by any reason of any default of the Principal until after the expiration of thirty days after such default, nor in any event, after the sixth day of January, 1929."

The receipt, a copy of which is attached to the amended petition and marked Exhibit D, contains certain recitals as to the liability of the surety company to the plaintiff on the bond and as to claim demand having been made upon said company for payment of its liability, following which it contains a recital as follows:

"Now, therefore, this is to acknowledge receipt from said American Surety Company of New York of the sum of Two Hundred Thousand Dollars ($200,000.00) in full discharge of its liability under said bond and to subrogate said American Surety Company to all the rights and remedies of the City of Findlay, Ohio, against said The Buckeye Commercial Savings Bank to the extent of not more than $300,000.00 after said city has received in full the balance due it from said bank on its deposit therein as of May 6, 1930, including the interest on said $200,000.00 and balance of said deposit from May 6th to the date of this assignment."

Said receipt also contains a subrogation assignment from the city to the surety company of its claim against said bank limited as above set forth.

On July 21, 1933, defendant American Surety Company of New York demurred to the amended petition on the following grounds:

1. That it appears upon the face of the petition that the facts therein contained do not constitute a cause of action in favor of plaintiff against this defendant.

2. That the action was not brought within the time limited for the commencement of this action, to wit, January 6, 1931, such action having been filed November 15, 1932.

On August 7, 1934, the cause was heard on the demurrer, and the demurrer was sustained by the court; and plaintiff not desiring to plead further, judgment was entered in favor of the defendant; and it was further ordered that the cause be dismissed as to all other defendants, and this proceeding in error is brought by the plaintiff in error to reverse said judgment in favor of American Surety Company.

The amended petition to which the demurrer was sustained, incorporated by reference all the exhibits attached to the original petition, and these exhibits as well as the exhibits attached to the amended petition, were treated by the plaintiff in his amended petition and by the defendant in its demurrer to the amended petition, and by the trial court on hearing of the demurrer, and by the parties in their briefs in this court, as a part of the petition, and they will therefore, for the purposes of this decision, be treated in the same manner. Byers v.Farmers' Ins. Co., 35 Ohio St. 606, 35 Am. Rep., 623.

The bond which is involved in this action, as shown by the allegations of the petition with reference to the conditions thereof, was entered into pursuant to the provisions of Section 4295, General Code, which section reads as follows:

"The council may provide by ordinance for the deposit of all public moneys coming into the hands of the treasurer, in such bank or banks, situated within the municipality or county, as offer, at competitive bidding, the highest rate of interest and give a good and sufficient bond issued by a surety company authorized to do business in the state, or furnish good and sufficient surety, or secure said moneys by a deposit of bonds or other interest bearing obligations of the United States or those for the payment of principal and interest of which the faith of the United States is pledged, including bonds of the District of Columbia; and farm loan bonds issued under the provisions of the act of congress known as the federal farm loan act, approved July 17, 1916, and amendments thereto; and bonds issued by the home owners loan corporation pursuant to the act of congress known as the home owners loan act of 1933, and the amendments thereto; bonds of the state of Ohio or of any other state of the United States; legally issued bonds of any city, village, county, township or other political subdivision of this or any other state or territory of the United States and as to which there has been no default of principal, interest or coupons, and which in the opinion of the treasurer are good and collectible providing the issuing body politic has not defaulted at any time since the year 1900, in the payment of the principal and interest of any of its bonds; notes issued under authority of law by any county, township, school district, road district, or municipal corporation of this state; said security to be subject to the approval of the proper municipal officers, in a sum not less than ten per cent in excess of the difference between the maximum amount at any time to be deposited, and such portion or amount thereof as shall at any time be insured by the federal deposit insurance corporation created pursuant to the act of congress known as the banking act of 1933, or by any other agency or instrumentality of the federal government, pursuant to said act or to any acts of congress amendatory thereof. And whenever any of the funds of any of the political subdivisions of the state shall be deposited under any of the depositary laws of the state, the securities herein mentioned, in addition to such other securities as are prescribed by law, may be accepted to secure such deposits."

In the case of Village of Wyoming v. The Citizens' Trust Guaranty Co., 9 Ohio App. 225 (motion to certify record overruled, April 2, 1918), which was a case involving the construction of a bond given pursuant to the section above mentioned, it was held that:

"A bond securing deposits made by a city or village in a designated depository is a statutory bond into which the provisions of the statute must be read, and the surety will be held to have contracted with reference to such statutory provisions.

"The amount for which the surety is liable, up to the face of its bond, is the amount with interest shown to remain due the municipality after liquidation of the depository."

This holding is in conformity with the decisions in the cases of the Southern Surety Co. v. Chambers, 115 Ohio St. 434,154 N.E. 786; American Guaranty Co. v. Cliff Wood Coal Supply Co.,115 Ohio St. 524, 155 N.E. 127; American Guaranty Co. v.Cincinnati Iron Steel Co., 115 Ohio St. 626, 155 N.E. 389, and supported by the weight of authority in other states. 90 A.L.R., 682.

In the Village of Wyoming case, supra, the amount of the bond was $10,000 and the amount deposited in the bank at the time of the suspension, including interest, was $19,306.19, and the court held that the surety company was liable for the deficiency between the amount received by the village by way of dividends on its claim, and the total amount of $19,306.19. The measure of liability was stated in this manner for the reason that action was not brought on the bond until the deficiency was determined. However, following the reasoning in that case it appears that the true rule is that the liability of a surety on a bond given pursuant to Section 4295, General Code, becomes absolute on the failure of the depository bank, principal, to pay in due course on legal demand all moneys deposited pursuant to the bond by the municipality, obligee, and that upon such failure it is the statutory duty and obligation of the surety to pay on demand to the municipality the amount of such deposits up to at least the amount of such bond, irrespective of whether the amount of such deposit exceeds the amount of such bond, and that the ultimate out of pocket liability of the surety on the bond is the difference between the amount paid in liquidating dividends by the depository bank on account of such deposit, and the amount of such deposit with interest. And following the reasoning in theVillage of Wyoming case and the other Ohio cases above cited, it is clear that any provision of the bond in any way tending to modify or lessen the statutory liability on the bond, is wholly void, such bond provisions not being effective to operate as a repeal or nullification of the provisions of the statute.

As the liability on the bond is fixed by statute and the statutory liability cannot be modified by provisions of the bond, any right of subrogation provided in the bond which has the effect of reducing the statutory duty and obligation of the surety on the bond is void, and the right of the surety to subrogation upon payment of the principal sum of the bond to the obligee must be determined by the general rules of equity relating to subrogation and not by resort to the provisions of the bond relating to subrogation. The question therefore arises as to what right of subrogation under the general rules of equity, a surety who has paid an obligee the principal amount of such bond, has as against the obligee of such bond to the liquidating dividends that may be paid by such depository bank on account of such deposit.

In 60 Corpus Juris, 745, 746, Section 54, the rule with reference to subrogation in the event mentioned, is stated as follows:

"To prevent impairment of the creditor's superior right to the possession and benefit of all securities and rights attaching to the debt until it is paid in full, it is generally held that, in order for the surety to have subrogation, the debt must be fully paid; and although the surety has paid the entire amount for which he is liable, he is not entitled to be subrogated to securities or rights which are held to enforce payment of other sums which remain unpaid."

The above rule is supported by many cases cited at page 746, of the same volume, including the cases of United States v. NationalSurety Co., 254 U.S. 73, 41 S. Ct., 29, 65 L. Ed., 143; Peoples v. Peoples Brothers, Inc., 254 F., 489; United States Fidelity GuarantyCo. v. Union Bank Trust Co., Circuit Court of Appeals, Sixth Circuit, 228 F., 448, and is specifically applied to surety on bond indemnifying obligee against loss for money deposited in bank, in the case of Maryland Casualty Co. v. Fouts, 11 F. (2nd), 71, 46 A.L.R., 852.

Applying the foregoing rules of law to the amended petition and the facts set forth in the exhibits therein referred to, the amended petition in legal effect charges statutory liability of the surety company to the city on the depository bond in the amount and of the nature hereinbefore set forth, which is not modified by the provisions of the bond with reference to the right of subrogation of the surety; that the surety company on payment of the principal sum of the bond was entitled to be subrogated to the claim of the city against the bank on account of such deposit only when the city had received the full amount of such deposit with interest, which is in conformity with the general rules of equity relating to subrogation; that the surety company, having no right to subrogation to the city's claim against the bank on account of such deposit until the city had been paid the full amount of such deposit with interest, received liquidating dividends amounting to $130,000 on $200,000 of the city's said deposit while there remained owing to the city on said deposit the sum of $14,096.35, which dividends up to the sum of $14,096.35 belonged to the city.

The question then arises as to whether the city upon such state of facts under its amended petition, is entitled to a remedy against the surety company to recover said sum of $14,096.35, with interest.

In 27 Ohio Jurisprudence, 146, Section 2, the rule is stated:

"Where one receives money that in equity and good conscience belongs to another, the latter may recover it as money received to his use. In other words, `the action lies in every instance where one has come into possession of money which should in good conscience be refunded to another.'"

While the petition states some facts indicating that the pleader considered the action as an action on the bond, the petition as a whole, as above set forth, charges the receipt by the surety company of money belonging to the city, and under the rule last mentioned constitutes a cause of action for money received by the surety company to the use of the city. The fact that the city, as shown by the receipt attached to the amended petition, had received $200,000 from the surety company in full discharge of the surety company's liability on the bond, is in no way a bar to the right of the city to recover, as under the cause of action stated in the petition the right of recovery is based on the receipt by the surety company, of dividends belonging to the city and is not based on the bond. For the same reason the provision of the bond limiting the time for action on the bond is not applicable.

As the petition states a cause of action for money had and received, the demurrer should have been overruled. This being the case, the judgment of the lower court will be reversed and the cause remanded with instructions to the lower court to overrule the demurrer, and for further proceedings according to law.

Judgment reversed.

CROW, P.J., and KLINGER, J., concur.